Brazil’s Aviation Dreams Are Turning Into a Recession-Fueled Nightmare

Fabiola Moura, Fabiola Moura

- Dec 03, 2015 10:01 am

Skift Take

Having empty airports is better than having no infrastructure at all — or a crumbling one.

— Jason Clampet

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The new terminal at Viracopos airport outside Sao Paulo cost $800 million in an effort to create Latin America’s largest hub –- bigger than London’s Heathrow by 2042.

But its vast, gleaming corridors, planned at the peak of Brazil’s bull years, are virtually empty except for staff as the country slogs through its worst recession in a quarter century. Unemployment reached 7.9 percent in October, and the economy isn’t expected to turn around until 2017 at the earliest.

Decisions by Copa Holdings SA and American Airlines Group Inc. to shelve December flights from Viracopos have left Azul Linhas Aereas Brasileiras SA as the airport’s only carrier with international service, flying daily to Florida. Azul doesn’t plan to serve New York from the facility until at least July.

The barren hallways at Viracopos echo the broader woes of Brazil’s airline industry. Domestic air travel tumbled 5.3 percent in October from a year earlier, logging the straight third monthly decline and notching the biggest drop in six years, according to the National Agency of Civil Aviation. Growth in international travel slowed sharply.

“We don’t expect an improvement for the next 24 months,” Eduardo Sanovicz, president of the Brazilian airlines association Abear, said last week. “The numbers will get worse in 2016 and will continue being bad in 2017.”

Azul, which has the third-biggest market share in Brazil, said Monday that it would cut capacity as much as 5 percent next year. Gol Linhas Aereas Inteligentes SA and Latam Airlines Group SA, Brazil’s biggest airlines, in recent months have said they are reducing capacity and postponing airplane deliveries. Gol also is stepping up subleases of aircraft to other carriers. Further capacity cuts and delayed deliveries, as well as job reductions, could be on the horizon across the industry.

Representatives for the group that manages Viracopos didn’t respond to requests for comment. Operations Director Marcelo Mota said in October that the airport would be willing to renegotiate contracts with stores, restaurants and airlines to keep their business.

Cutting Capacity

Other airlines need to pare back service, said Citigroup Inc. analyst Stephen Trent. Domestic capacity is expected to fall about 5 percent next year, Savanthi Syth, an analyst at Raymond James Financial Inc., wrote in a Nov. 23 report.

Evaporating demand isn’t the only specter looming for airlines. Brazil’s currency, the real, has dropped 31 percent against the U.S. dollar this year, the most among major currencies. That has pressured costs — such as for fuel, maintenance and aircraft leases — about 60 percent of which are linked to the U.S. currency.

“The Brazilian real value has been all over the place this year,” Trent said. “There are elements in the market that treat the airlines as outright disasters when the dollar is getting stronger and they treat the airlines like miracle workers suddenly” when the real gets stronger. “I don’t think either treatment is fair, even as I do believe foreign currency has a very important impact.”

Second Thoughts

Airlines are coping in various ways. The Brazilian operation of Avianca Holdings SA, the country’s fourth largest carrier by market share, says it will probably keep its fleet size steady next year, after receiving eight Airbus A320 midrange jets to modernize its fleet, increasing seat capacity 15 percent this year.

“I confess, if we were to have taken this decision in January this year, we probably wouldn’t have made it,’’ Avianca Brasil Chief Executive Officer Jose Efromovich told reporters recently.

Azul last week agreed to sell a 24 percent stake to Chinese conglomerate HNA Group Co. for 1.7 billion reais ($440 million) to raise cash to reduce debt and renovate its fleet. CEO Antonoaldo Neves said Monday that beyond the capacity cut, the airline probably will retire some of its older jets and doesn’t expect to conduct an initial public offering in 2016. Azul has already postponed its IPO three times.

March Plans

Viracopos’s new terminal is expected to concentrate all the passenger operations, including domestic ones, by March. It will probably take some time to reach full capacity, however.

“Next year will be an extremely difficult year to generate value,” Neves said. “All four airlines are worried. We hope the government and the staff unions understand we all need to help each other.”

–With assistance from Rafael Mendes.

This article was written by Fabiola Moura from Bloomberg and was legally licensed through the NewsCred publisher network.

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